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① Quick introduction:
Volume Profile indicator utilizes horizontal bars to represent trading activity at various price levels.
The bars are arranged vertically, with taller bars indicating areas of higher trade activity. Usually, tall bars can serve as support levels.
The Volume Profile is a charting technique created in the late 1980s by a trader called Peter Steidlmayer.
To put it simply, the Volume Profile (VP) indicator is a tool used in technical analysis to show how trading volume is distributed across various price levels during a specific period.
② How VP is Calculated
Essentially, Volume Profile takes the total volume traded at a specific price level during the specified time period and divides the total volume into either up volume (trades that moved the price up) or down volume (trades that moved the price down) and then makes that information easily visible to the trader.
③ Why understanding volume can be very useful for you:
Really, stop for a minute and try to think about why this metric really matters.
Pros say that price is simply an advertising mechanism in which time governs all advertised opportunities and volume ultimately determines the success or failure of all advertised opportunities.
④ Utilizing the Fixed Range Volume Profile (FRVP) indicator for trading
Now that you're prepared and have basic knowledge, let's delve into the FRVP tool.
This tool enables you to set a fixed range for the volume profile within a specific time frame.
You can find the FRVP Tool under "Prediction & Measurement Tools" on the left side of the chart on @TradingView platform.
⑤ How to use it effectively:
After selecting the FRVP tool, you will be prompted to specify a start and end point to calculate a volume profile distribution.
This tool is particularly effective in analyzing various impulse moves.
Here is an example with an impulse move on the D1 of DOGE/USDT.
⑥ Now, here is a more detailed explanation of the indicator:
We can define the following:
➬ Value Area High (VAH) – the highest price in the Value Area;
➬ Value Area Low (VAL) – the lowest price in the Value Area;
➬ Point of Control (PoC) – the most interesting things for us, it's the price level at which the maximum number of contracts were executed during a selected period.
⑦ FRVP trading example:
In the example below, we see the market cooling off after a prolonged uptrend to the left (finishing just on the edge of the chart). The price fell sharply, finding a bottom. Given the distinct high and low points, we can set the FRVP tool to these points.
The first area to notice is the POC, which acted as strong resistance within the multi-day range. Traders could have anticipated this area to hold, using other forms of technical analysis to find entries on a lower timeframe.
The POC area was eventually pierced through, indicating that it may be time for the price to come and meet the LVN toward the top of the range. This level represented the area with the lowest volume in the entire range. Combined with the prior bullishness offscreen, traders could have been confident that the price would at least reach this area, acting as a solid target if they had bought earlier near the POC.
However, it moved higher to tap the HVN. Notice that it’s the area with the highest volume besides the POC. After reaching the HVN, the price quickly reversed. Similar to the POC, traders could have anticipated bearishness from this area. The tweezer top chart pattern here acted as excellent confirmation.
⑧ Common mistakes when using the Fixed Range Volume Profile indicator:
What common mistakes do traders often make when using the Fixed Range Volume Profile indicator?
Neglecting other market indicators
Some traders rely solely on Fixed Range Volume Profile and ignore other crucial market indicators. This approach can result in a one-dimensional trading strategy, which is never a good thing. A solid Fixed Range Volume Profile strategy should include other tools that can help confirm reversals at support or resistance levels, like the Relative Strength Index (RSI) or MACD.
Over-reliance on historical data
While the FRVP is effective in visualizing historical trading activity, it is not a crystal ball predicting future price movements. Traders should avoid the mistake of considering the volume profile as the sole indicator of future trends. It’s a good idea to consider the fundamental factors that may drive a market in a certain direction and then complement your analysis with the FRVP.
Misinterpretation of volume nodes
Traders may incorrectly assume that all HVNs or LVNs are equally significant. However, their importance can vary based on the broader market context. For instance, strong bullishness in the market may cause an HVN to be traded through with little consideration.
✪ To summarize everything above:
In this guide, we've unpacked the complexities of the Fixed Range Volume Profile (FRVP), revealing its components, applications, and potential pitfalls.
You've learned how the FRVP offers insight into the relationship between volume and price data, aids in trend identification, and pinpoints crucial support and resistance levels.
By now, you should have a comprehensive understanding of when and how to utilize the FRVP.
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